Hi.

Aug 29 Budgets for Small Business, Using Cash

So you want to know how to manage your business finances better through budgeting. Hooray! I love budgets. But only the good ones. And truth be told - most budgets and budgeting systems or apps out there are bad ones.

A budget *should* be pretty simple, right? You figure out how much money you make, and how much money you have going out, and whatever’s left is for saving or spending money. But let me guess...you’ve tried that, and it didn’t really work. So you find yourself at your trusty Google asking the world what you’re missing.

I could write a book about what’s missing here, but in a nutshell, the problems are:

Traditional budgets (like what we just described) are based on estimates, not actual money that you have.

They’re inflexible - they assume your income and your expenses are the same every month. Does any freelancer have a life like that? Even if your income is steady, there are tons of expenses that are different month to month.

They don’t tell you much. I think it’s safe to assume that you’re interested in changing your financial situation, so you’ve got some questions that you don’t know if you can answer. Questions like “how much can I pay towards my credit card this month?” and “can I afford to buy a newer car?” Traditional budgets just can’t really tell you this. They’re not designed to.

So what should you do instead?

Here are three tested ways to make a budget that actually works:

Use cash and envelopes

You might have heard of “envelope budgeting” - your parents or grandparents might have done it. In its simplest form, it literally means cashing your paychecks, sitting down at the kitchen table with envelopes marked “groceries” and “mortgage” and putting cash in the envelopes until it’s all divvied up, and then using that cash when spending. The idea here is that you’re only working with money you really have, and when something changes (like a bill comes in higher than expected), you take money from another envelope to cover it. Then, when you get paid again, you go back to your envelopes.

This system undoubtedly gets rid of increased credit card debt and overspending. This can be tricky in our digital age and for services and utilities that make it hard to pay in cash, but if you can swing it, this is a rock-solid way to not go over budget. You can also do this by using multiple bank accounts and debit cards, but that takes a lot of mental energy to keep up with and is a recipe for overdraft fees.

For those of us non-Luddites, I recommend tools that are a little more high-tech (and frankly, a lot easier to use in the long-run!). Not all tools are created equal, however - so you want a zero-based tool.

Zero-based budgeting is just a fancy name for the envelope budgeting system I mention above. There are lots of budgeting tools and apps out there now, but the best one I’ve seen (and the one that I’ve personally used for over a decade) is You Need A Budget (YNAB). It’s all digital, flexible, powerful, and has excellent support. I like a digital tool because it’s easy and does the math for me, so I’m more likely to stick with it. This is what I do myself and recommend for most people I work with.

BONUS: Use that link for YNAB and we'll both get a free month of service (that's two months for you, since they already offer a free 34 day trial.

3. A combination of an app and cash

This is the magic sweet spot for a lot of people. Using a tool that helps you increase your money awareness with cash and envelopes for those areas of your life that always seem to “get away from you” spending wise is a great way to keep a tight rein around your money while still keeping your Netflix subscription.

No matter what you do, the key is to keep it simple. You want this to feel less like a diet and more like a lifestyle change. There is no sense in setting up a fantastic system that you never use.

Now get out there and get budgeting!

Editor’s note: I always recommend using credit cards, paying them off 100% at the end of the month, and getting points to put towards travel. However, if you’re not quite there yet and want to stick with cash, these tips will help get you started. We’ll have an article coming up on using credit cards for business.

Lynne Somerman is the money maven behind The Wiser Miser, where folks feel better about their money with tried and true ideas that go beyond the basics, all in a no-shame safe zone.

Helping the self-employed handle that old familiar cash flow rollercoaster is her nerdy specialty.